The inclusion of Microsoft and Intel in the Dow Jones Industrials has not
stemmed the erosion of this venerated market index. For a year and a quarter
now, the market has been flat. We are left wondering if Microsoft will turn out
to be one of the "Dogs of the Dow".

On April 20, 2000, the Wall Street Journal referred to Qualcomm as a
"blue chip". Well, call me an old fogy, or what you will, but I
cannot help but believe that the name of an internet company and the term
"blue chip", when written side-by-side, constitute an oxymoron—at
least at this point in time.

Generally, in the early evening, after the markets close, I go out to play
tennis. Very often, people at the various clubs at which I play ask me "how
did the market do?" For years I have replied by recounting the movement of
the Dow Jones Industrial Average, which was the answer everyone expected. They
all knew what I was talking about and what it meant.

Lately, though, people have been asking "what did the NASDAQ do
today?". And what is really striking in this turn of events is the profile
of the questioners. They are not the young hotshots that you might expect.
Rather, they cut across all strata of society, with a generous sampling of
people well into their retirement years.

Many of these folks took significant hits to their net worth in the mid second
quarter. The pundits among them have been saying that the year ’00 is turning
out to be pronounced "uh-oh". They are learning lessons that I
learned in the late 60’s. But I was young and didn’t have anything
much to lose. A year ago these people were gloating, and now, though I feel
their pain, I find myself secretly smirking at their comeuppance.

The situation has given me ample occasion to quote "The Money Game" by Adam Smith
(nee George Goodman): e.g., "if you don’t know who you are, this is an
expensive place to find out." The book is an excellent read, and as
applicable today as at any time in market history.

I am once again indebted to the Dow Jones publication "Barron’s"
for the insight that 81.5% of NYSE stocks, 72.4% of NASDAQ stocks, and 59.7% of
the S&P 500 stocks are below their 1997 highs. You can easily infer that we
have been in a bear market for the last three years, the averages
notwithstanding.

Let me put this in a different way: if, in 1997, you had invested in a basket
of NYSE stocks, today, after three years of double-digit gains in the
DJIA, eight out of ten of your stocks are likely to be lower. If you think my
business is easy, you are mistaken.

I hope the Fed remembers that higher interest rates are inflationary.

With oil at a level near double the prices that prevailed less than a year
ago, and with mortgage rates sharply higher than 18 months earlier, it is my
personal opinion that the Fed is very near, or at, the end of its program of
raising rates. We currently have a prime rate of 9.5%. I cannot see Alan
Greenspan pushing through a rate rise that would force that number to double
digits. Especially in a presidential election year.

If twenty-five basis points is the maximum boost from here, then what next?
And what are the ramifications should the rate increases halt? Even more
important, what would be the reaction if rates were to head down?

Without too much rumination, you could posit a soft market into the early
summer, as the players sort it all out, with a classic summer rally to follow
later. I believe that this is the likely scenario. I will go out on a limb
here, and say that it is my opinion that we are very close to seeing the Fed
actually reverse course and lower rates. I would not be surprised to see
such a move by the end of this year. I believe it is a good time to buy
bonds.